State legislators got a crash course in budget high finance Tuesday, mixed with a dash of constitutional law.
After more than 12 months of planning, securitization – that mysterious financial process that can close a $1 billion-plus budget gap without tax hikes or deep program cuts – was yanked unceremoniously off the budget table. In its place was a hybrid financing mechanism with an optimistic name: Economic Recovery Revenue Bonds.
As with securitization, these revenue bonds are like borrowing, but just different enough, fiscal authorities said, not to run afoul of the state Constitution.
Both would raise huge funds next fiscal year, and in return, would forfeit even more state funds down the road.
And each option involves unpleasant choices, like adding surcharges to electric bills and raiding energy conservation programs that fund thousands of jobs.
So what is the difference?
According to legislators, the biggest difference is hope. Specifically, the compromise financing scheme built into the budget deal negotiated this week by Gov. M. Jodi Rell and legislative leaders leaves open the possibility that the worst aspects of securitization could be at least delayed, and at best scaled back or avoided entirely.
“Securitization was just a nightmare right from the beginning,” said Sen. Paul R. Doyle, D-Wethersfield, who added that the more residents hear about it, the less they like it. “There is no good root canal and there is no good securitization.”
“Securitization was like having a going-out-of-business sale, or going to a pawn broker,” said Rep. David McCluskey, D-West Hartford. “It’s like your desperate sell and that’s not good.”
In the context of the original $18.93 billion budget adopted last fall for 2010-11, securitizing meant promising investors the rights to revenues estimated to be worth $180 million per year, for the next decade, in exchange for $1.3 billion right now.
That’s not a promise to pay $1.8 billion, only a guarantee that the investor has all rights to particular sources of revenue. They might end up being worth more or less than $1.8 billion, but the investor takes the risk.
Not surprisingly, interest charges on securitization tend to be higher than those in traditional borrowing, in which the borrower promises to repay the lender a precise amount. And rather than selecting a specific tax or fee to finance the loan repayments, state government pays off its traditional borrowing debts from its General Fund.
Rell proposed scrapping securitization last week and employing traditional borrowing, arguing it could cut interest and related costs by more than $300 million over the next decade. There was just one problem with that: The state Constitution doesn’t allow it.
Article 28 of the amendments requires a balanced budget. The legislature and governor can borrow funds at the end of fiscal year to cover an unanticipated shortfall, but they can’t borrow dollars to provide revenue for a budget year that hasn’t even started yet.
To get around that constitutional prohibition, Rell wanted to force this year’s $18.64 billion budget which was only recently balanced, back into massive debt. She would have shifted $1 billion in resources from 2009-10 into 2010-11. And since the current budget already is underway, state officials can classify that new debt as unanticipated, and borrow to cover the gap.
But Rell wanted to pay off her budget-balancing plan with electric bill surcharges and conservation program raids, and Democrats weren’t any more anxious to take those steps now to cover traditional borrowing than they were to implement securitization.
So if securitization has turned into a costly and political mess, and if they aren’t ready to embrace the governor’s alternative, what’s left?
Enter the recovery revenue bonds.
Unlike with securitization, the state repays a precise amount to those who buy its revenue bonds, minimizing risk for investors and securing lower interest rates.
And according to state Treasurer Denise L. Nappier’s office, issuing revenue bonds for economic recovery, or budget-balancing purposes, does not count as traditional borrowing as far as the Constitution is concerned.
As it must with securitization, state government has to specify where the dollars to cover these revenue bonds will come from. That meant that the ever-present electric bill surcharges and conservation program raids targeted to finance securitization would still happen.
But because those revenues bonds don’t have to be issued this fiscal year, when traditional borrowing would otherwise occur, lawmakers can postpone implementing the electric bill surcharges and conservation fund raids that are so controversial.
State revenues have rebounded modestly as the economy has shown new signs of life in recent weeks, and those extra dollars already have helped to drive the securitization target figure down from $1.3 billion to about $1 billion.
How much more could it be lowered, Democrats asked, if state revenues grow further over the next 12 months? Might surcharges and fund raids be scaled back or eliminated entirely if the economy booms in 2010-11?
“What I tell people is that I’m not very good with finances, but we balanced the budget with some very difficult choices,” Sen. Edith G. Prague, D-Columbia, said. “We did our best. Hopefully things will get a little better.”